Hi Dave,
Don't despair. Your lathe can probably do all you want of it, but as you build your skills you'll find out that 'level','square' and 'parallel' demand more of our skills in engineering than in everyday life!
I misread '"increases as you get nearer the chuck" but it seems it does get bigger near the tailstock.
Jason is right, don't rely on the graduations to set the topslide – you need to judge the graduations to a thousandth of an inch and even if they are accurate you can't do that by eye. You may be able to set it square using a GOOD engineers square if they are ground accurately all over.
Even so. it's normal to do nearly all cutting suing the cross slide (for facing across the lathe) and saddle movements. the top slide is usually reserved for tapers (which are often set by trial and error or 'cut and fit'
or for moving the tool by accurate distances (e.g. you want to turn a set of carefully spaced grooves).
The old masters could turn anything to a perfect fit with a steel rule and some calipers. Us mortals greatly benefit from some more advanced equipment – a decent digital vernier is the cheapest way to start working accurately, but in time you will probably want a DTI and a micrometer as well.
If you aren't sure on anything, don't be afraid to ask – none of us knew when we started either. You've found a good place to seek advice.
Regards
Neil